Halbig as Opt-In Federalism

Joseph Fishkin

The commentary about Halbig so far has viewed it mainly through two lenses.  Through one lens, most obviously, it’s a statutory interpretation case—one that illustrates some shortcomings of a certain hyper-formalistic, acontextual approach to reading statutory text.  Through the other lens, Halbig is a political case: a highly charged proxy fight about Obamacare that illustrates how thin and permeable the membrane is between some judges’ substantive political views of a law and their interpretation of it.

I think Halbig is even more interesting through a third lens: as a federalism case.

Here, ironies abound.  In NFIB v. Sebelius, the majority decided that the ACA’s Medicaid expansion raised constitutional questions because it put a gun to the head of the states: you will lose an enormous chunk of federal money unless you agree to expand Medicaid.  To the utter consternation of the legislators who wrote and voted for the ACA, the 2-1 majority in the DC Circuit in Halbig has interpreted the exchange portion of the statute to similarly threaten states with a catastrophic loss of federal funds if they don’t comply with the federal government’s demands—this time, supposedly, the demand that the state set up an insurance exchange.

As many commentators (including other judges, in dissent in Halbig and in the majority in the 4th Circuit) have noted, it’s abundantly clear not only from the legislative history of the statute but also from other parts of its text that no such threat was ever actually contemplated.  The whole point of the backup federal exchange was to give states a different kind of choice: they can either take control of (and responsibility for) the regulation of the new insurance plans in their state by establishing an exchange, or they can wash their hands of it, and let the federal government take the full credit and blame for the system that results.  That was the kind of federalism the ACA had in mind: backstop federalism, in which every individual American would have access to the same substantive benefits, but they could be administered either in a cooperative-federalism way, or, in uncooperative red states, by the feds alone.  This gives states real choices about how much involvement they want in the ACA’s new insurance system.  It doesn’t give states the option to deprive their citizens of access to affordable health insurance.

But the Halbig panel majority doesn’t read the statute in terms of what subsidies the ACA, by its terms, intends to make available to individual citizens.  Instead the panel majority manages to take the individual citizens out of the picture, and tell a simple story of a threatening federal government, holding a gun and demanding that the states set up an exchange or lose all subsidies.  This analysis is overly simplistic in a couple of ways.  For a start, it ignores where the gun is actually pointing.  The analysis also manages to obscure the question of what a state actually has to do to set up an exchange “under” Section 1311.   It may not be much at all, for reasons I discuss below, in which case the real story here is not one of the federal government requiring onerous action by states, but instead, one in which the Halbig court would turn what Congress intended as universal individual entitlement into a program of opt-in federalism, where the federal government might try to create a universal program, but it’s actually up to states to decide whether they want to opt in.


When NFIB v Sebelius came down, I thought the majority’s simple feds-with-a-gun-to-the-heads-of-the-states analysis was too simple: in fact, because the federal government cares deeply about expanding Medicaid to cover uninsured adults in all the states, I thought the feds and the states might work out some solutions to the Medicaid expansion question other than “yes” or “no.”  HHS has authority to let states expand Medicaid in unorthodox ways, including by pushing some people who might have been on Medicaid into the exchanges (with the very subsidies now being called into question in Halbig!).  There has in fact been a bit of this unorthodox compromising on Medicaid, but not as much as I expected.  State governors in many red states have been more willing than I had thought to tolerate leaving many more of their poor citizens still stuck in the emergency room, entirely without insurance, if that’s what it takes to strike a blow against federal tyranny.

The majority’s analysis in Halbig manufactures a parallel federal threat to withhold subsidy funds unless the state sets up an exchange.  It thereby conjures a new federal-gun-to-the-state’s-head situation parallel to the one the NFIB court saw in the Medicaid expansion.  Once again, it seems to me that the real gun is being pointed a different way: at all the individual citizens who may lose their affordable health insurance.  After all, let’s remember what this is about: ordinary citizens are the ones some small number of whom, statistically, will actually die because they do not have insurance.

And once again it seems to me that a key piece missing from the Halbig analysis is that the federal-versus-state exchange question is not a binary choice.  Some states, such as Oregon, have set up exchanges that performed badly in technical terms this year; over the next year or two several of these states plan to enter into arrangements with the federal government that involve the feds running the technical back end, even though this will still be a state exchange under Section 1311 of the ACA.  All states setting up state exchanges have been working with HHS to a greater or lesser degree.  But now that the federal exchange has gotten over its major initial glitches, it may make sense for many states to “operate” exchanges that are “state exchanges” in statutory and regulatory terms, but in technical/computing terms, they’re basically the federal exchange with a state front end.

So one important practical question Halbig raises is this: what makes a state exchange a state exchange?  If the view of the 2-1 majority in Halbig were to prevail at the Supreme Court (a prospect I’d still consider unlikely, because the reading of the statute is so wildly implausible), then what is the minimum a state can do that counts as a “state exchange” for purposes of receiving the federal subsidies?

Can a state pass a statute that says, simply: “We hereby establish a state exchange under ACA Section 1311, to be run by such and such ‘governmental agency or nonprofit,’ which is directed to work with HHS, which in turn will actually administer every aspect of our new state exchange as they have been doing up to now for our existing federal Section 1321 exchange.”   Will that work?

It’s hard to see why not.  If a state wants to set up an exchange, nothing in the ACA prohibits getting federal help.  All the functions the ACA requires of state exchanges—maintaining a website and a hotline, rating health plans, keeping track of who’s enrolled and who’s getting tax credits, etc.—are things that one suspects HHS would be happy to help out with, if asked.  Especially with a federal exchange up and running and doing all these things already in the state, why reinvent the wheel?

If this is true, then Halbig backs into a strange kind of federalism—one quite different from what the ACA’s drafters had in mind.  Instead of the intended backstop federalism, Halbig sets up a regime in which states basically just need to say some magic words (“we hereby set up an exchange under Sec. 1311”) and then enormous amounts of federal money will automatically flow to their citizens, fulfilling the policy goals of the ACA of reducing the number of uninsured.  Or, states can refuse to say those words, and no money flows.  It gives states a tremendous lever, the power to control whether the federal government’s massive new scheme works in their state as intended, or blows up into an enormous mess that no one intended.

And while it may be perverse to point out that there might be political gains from the blow-it-up approach, of course there could be.  It would certainly show the people, albeit in a deeply cynical and destructive way, that the federal government can’t do anything right and that Obamacare is a disaster.  If making that point is your highest calling in politics, then this may be just the strategy for you.

But that’s not the end of the story.  There are two interesting further wrinkles.

First: I don’t expect the Halbig plaintiffs to prevail anyway, but if they do, it won’t be for some time.  By 2016, millions of Americans in states without Section 1311 state exchanges will have insurance.  This will make states’ choices starker and the stakes higher.   To refuse to say the magic words will not only deny hundreds of thousands of your citizens affordable health insurance—it will take that insurance away from your citizens and voters who already have it.  Endowment effects make those two things very different: a bird in the hand is worth at least two, if not more, vague promises of wonderful future benefits.  And we’re not talking about taking away the health insurance from really poor voters who rarely vote.  The exchanges are mostly for the middle class; substantial subsidies basically go to the lower middle class.

I would hope that even a deep-red state facing the choice Halbig sets up would start to feel a little uncomfortable about pulling out of the exchange-subsidy system.  The choice to do so—by refusing to say the magic words—would be so disruptive and so enormously costly that it ought to give pause to any politician with a pragmatic bone in her body.  To be sure, for the most ideological opponents of Obamacare, the choice may be easy.  But I continue to believe that there are pragmatic legislators in the Republican party who will not want to blow up their insurance system—which will by then have been running for a couple of years—in the way that the Halbig majority would empower them to do.

However, here’s the second wrinkle.  The choice the Halbig majority manufactures for states out of messy statutory language is not an “opt-out”—it’s an opt-in.  States have to act—at a minimum, they have to say something like the magic words outlined above—if they want to avoid a massive disruption of their citizens’ insurance (and their hosptials’ and doctors’ revenue, and their insurance premium rates, and much else in their state medical system).  Inaction would mean no subsidies.  That is, no heroics are required of the state here—no nullification or interposition or lawsuits against the feds.  To stop the federal government, all a state needs to do is do nothing.

That means that in states that are closely divided or deadlocked, only one veto point, such as one legislative chamber, is probably needed to block the state from saying the magic words.  This suggests to me that if the majority view in Halbig ultimately were to prevail, things might get very ugly, with more states than one might otherwise expect racing off the cliff.

This would make Americans even more cynical about our political system.  And frankly they’d have every right to be.  Perversely but predictably, that tends to benefit all politicians whose worldviews begin with the axiom that the government, especially the federal government, can’t do anything right.
Posted 1:30 AM by Joseph Fishkin [link]